Base Metals Miners Performance in 2019
Copper, often called “Dr. Copper” due to its correlation with the economic cycle, could be the trade of 2020, as most industry analysts expect a “lift-off” for the base metals miners as global demand recovers.
Copper prices rose this week, on December 25th, 2019, to their highest level in seven months, highlighting how a brighter view of the world economy is supporting riskier corners of the market.
Since copper is an industrial metal critical to the manufacturing and construction industries, copper is extremely sensitive to investors’ perception of global growth. The metal is closely tied to China, which accounts for roughly half of the world’s consumption.
Gold miners had an amazing year in 2019 because of the expectations of U.S. Federal Reserve rate cuts and as geopolitical tension mounted between the U.S.-China. However, concern about dampened global demand as a result of trade threats left base metal miners limping into the new year, reports Bloomberg.
According to Jefferies analyst Christopher LaFemina that might reverse next year as the demand improves, making copper “poised for lift-off.” Low copper inventories, supply constraints, high short positions, and better demand are creating conditions for the base metal miners to rally, he wrote in a note to clients.
Goldman Sach’s Jeffrey Currie joining LaFemina in his optimism thinks copper is “set to inflect” in 2020 due to strong growth out of China.
Bank of America, Morgan Stanley, and Citi also have positive expectations for copper and an improving global economy.
History shows that base metal miners have often caught up with gold equities after precious metals outperformed. The S&P/TSX Equal Weight Global Base Metals Index (TXBE) underperformed the S&P/TSX Equal Weight Global Gold Index (TXGE) in 2016 but caught up by the end of 2017. If analysts are right about the outlook for copper in 2020, the same trend may be coming soon.
What Analysts Say About Base Metals Miners
Here is what the analysts are saying about the metals and mining sector in 2020:
Jefferies is most bullish on copper miners for 2020 as current supplies won’t be able to meet “even a modest cyclical recovery in demand,” LaFemina wrote. The firm expects Freeport-McMoRan Inc., First Quantum Minerals Ltd., and Glencore PLC to benefit most from the copper price recovery. His top picks are Freeport and First Quantum. He also expects select iron ore miners such as Anglo American PLC, Vale SA, and Rio Tinto PLC to outperform as prices are expected to remain high, peaking at more than $100 per ton in the near-term.
“Copper is our most bullish view,” for 2020, according to Goldman Sachs’ commodity team. Copper demand in China has been particularly restrained by “poor performance in the grid, property and transportation sectors” and that is likely to change heading into 2020. “We expect strong completion growth in the next two years, continuing a positive trend in the property sector since August,” and grid investment is very likely to pick up in the first quarter of 2020 thanks to the government infrastructure stimulus.
Citi is most bullish on alumina, copper and coking coal in 2020, while bearish on zinc and iron ore. Commodities will benefit from modestly higher global growth, with much of the improvement coming from emerging markets as Citi thinks. Its commodities team is also bullish on gold in the medium-term. The bank’s equity analyst upgraded Teck Resources Ltd.’s rating to buy on better a coking coal outlook and valuation.
Morgan Stanley’s commodities team expects a moderate rise in demand in 2020, driven by a “mini-cycle recovery” through year-end. The bank remains constructive on the North American mining sector and particularly favors copper exposure. It sees Freeport-McMoRan and Teck Resources as the best way to gain exposure to bullish copper sentiment. Their commodities team is bearish on the aluminum and alumina outlook, but the equity analysts still see some upside in 2020 for Alcoa Corp. They also expect higher met coal prices as ex-China demand should tighten the market. Bank’s top commodity picks are copper and cobalt, while the least preferred are iron ore, lithium, and zinc.
Bank of America
Bank of America sees cyclical raw materials benefiting in 2020 from a potential inventory restocking cycle, easier Fed policy, and an interim China trade deal, providing an attractive inflation hedge. They think that copper and nickel are likely to rally in 2020, while the outlook for gold and precious metals is more cautious.
This article originally appeared at Mining Global.